Price Differentiation and Degrees of Consumer Surplus

Join this study group for discussion on Economics @ Finance Clubb

Share to download class notes

[sociallocker id=”1679″]Thanks for sharing this lesson. Click here to download[/sociallocker]

1.1 Price Differentiation

When different price is charged from different consumers for same commodity, then it is termed as price differentiation. Price differentiation helps in reducing the consumer surplus and maximizing the profit of the producer.

1.2 Degrees of Price Differentiation

 There are three degrees of price differentiation:

1.2.1 First Degree

In this case every consumers pays maximum price they are willing to pay.

  • This requires perfectly segmented markets where the company divides the whole market into segments for each individual consumer.
  • The company charges each customer exactly what they are willing and able to pay

Auctions are a very good example of first degree price discrimination.

1.2.2 Second Degree

In this case though market is segmented in different types, but producer is not able to identify the segments himself.

This form of Price Discrimination generally occurs when:

  • The seller charges different prices for different quantities
  • The company sells  surplus quantities
  • When the seller is willing to give “early bird” discounts

When prices are differentiated by peak and off peak pricing

1.2.3 Third Degree

In this case producer is able to identify the different market segment and charges different price on the basis of that.

Some of the ways on which price differentiation can be done are:

  • Geography: In this case a supplier charges for instance a different price in different countries / places (say a mall and a local market.
  • Groups of people: Students and retirees are often charged less because they usually have less money to spare. In tourist areas prices are often higher because people on vacation are often willing to spend more.